Win-Win: Goldman Sachs, SEC Can Both Declare Victory in Abacus Case

In the movies, the SEC'sepic duel with Goldman Sachs (GS) would've climaxed with a grizzled-but-dashing government official, preferably played by George Clooney, making a rousing speech. Justice would be served, wrongs righted and faith restored in the essential goodness of humankind.

Reality bites. Goldman escaped with a fine that, while large by Washington standards, is the cost of doing business on Wall Street. True, $550 million isn't pocket change. It's closer to 14 days worth of earnings for the investment bank, according to Bloomberg, or roughly what Goldman CEO Lloyd Blankfein owns in company stock.

More to the point, the firm admitted only to making mistakes in marketing its Abacus CDO (oops!), not to defrauding investors, as the SEC originally alleged. That's a disappointment to anyone hoping for perp walks and, here's a thought, punishment fitting the crime. The best the SEC could do is to bar Goldman in the consent agreement "from arguing that it did not violate the federal securities laws." Not guilty, your honor. Not innocent, either.

Thing is, this case was always headed for a draw. Fraud is hard to prove. By contrast, agreeing to lesser charges allows the government to crow that Wall Street has been properly warned, while Goldman ends a distracting sideshow and avoids a potentially debilitating prosecution. In this way, the settlement resembles then-New York AG Eliot Spitzer's 2002 peace treaty with Merrill Lynch over charges that its analysts cooked their stock ratings.

[Goldman's] shares are soaring in after-market trade, and although they won't approach their pre-case levels any time soon, Goldman can now begin to distance itself from Abacus noise, and try to put the whole sordid tale behind it.

In financial markets, memories are short, and the effects of this case and its settlement will fade away quite quickly.

I'm less sure about the last part. The settlement appears to give ample legal ammunition to investors considering private litigation against Goldman or other banks that may have misrepresented CDOs. Indeed, Royal Bank of Scotland is already weighing such a suit. More will follow. Writes Tom Adams, an attorney and former financial services exec:

[T]he SEC has opened the door to further inquiries into the CDO-selling business. Other investors in blown up CDOs may now be emboldened to go after Goldman and other manufacturers of CDOs. Goldman has conceded that, on this Abacus transaction, they used inaccurate statements in the offering documents to sell the CDO. With this settlement, the SEC has demonstrated that investors in such a CDO can win a recovery as a result of such inaccurate statements.

Whether the settlement itself does much to change how big banks do business is another story. Spitzer's jihad ultimately did nothing to clamp down on banker bonuses, let alone eliminate the conflicts of interest that lie at the heart of darkness on the Street. On that score, SEC enforcement chief Robert Khuzami's remarks in announcing the settlement don't inspire much confidence:

We would strongly encourage other institutions to adopt any kind of best practices that they see across the Street in order to prevent this kind of wrongdoing. Deterrence and preventing a fraud before it occurs is a much better outcome than picking up the pieces afterwards.

"Best practices" may mean something to consultants, but they're barely a thought bubble on Wall Street. And it's not the kind of language you'd expect to hear if the SEC planned to lower the boom against other banks pushing dodgy CDOs. Fade to black.